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An Indian business does not have to deduct income tax merely because it is paying a vendor outside India. The first question is whether the payment, or an identifiable part of it, is chargeable to Indian income tax under domestic law. The next question is whether an applicable Double Taxation Avoidance Agreement (DTAA) limits India’s taxing rights for an eligible recipient.
Only after those questions are addressed can the payer determine the applicable withholding, reporting and remittance steps. A foreign vendor’s invoice may describe a payment as consultancy, technical support, software licence fees or reimbursement. That description is evidence, but it is not necessarily its legal classification.
The contract matters. The rights or services actually supplied matter. The use of those rights or services matters. The recipient’s tax residence and treaty entitlement matter. The dates of credit, payment and remittance matter too.
Does every payment to a foreign vendor require Indian TDS?
No. Section 393(2), Table Sl. No. 17 of the Income-tax Act, 2025 addresses specified payments to a non-resident (not being a company) or a foreign company, including sums chargeable under the Act, other than salary and amounts governed by other relevant withholding entries. Paying into a foreign bank account does not itself satisfy that chargeability condition.
The payer must identify the recipient, the transaction and its legal character. For example, a payment to a business in Dubai may involve an ordinary business service, technical or consultancy services, or the granting of intellectual-property rights. Different domestic-law and treaty provisions may apply.
The ordinary preliminary questions are:
- Who is legally entitled to receive the amount, and what is that person’s tax status?
- What does the contract actually require: services, licensed rights, a supply of goods, a reimbursement or a combination?
- Is the amount chargeable under Indian domestic income-tax law, and is a specific statutory exception available?
- Does an applicable treaty restrict Indian taxation for the eligible recipient?
- Is withholding required, and is any valid determination or lower/nil deduction certificate relevant?
The bank’s request for a tax declaration does not create chargeability. Equally, the foreign vendor’s assertion that it has no office in India does not, by itself, settle taxability.
Which Act applies after 1 April 2026?
| Question | Through 31 March 2026 | From 1 April 2026 |
|---|---|---|
| General withholding on chargeable non-resident sums | Income-tax Act, 1961, section 195 | Income-tax Act, 2025, section 393(2), Table Sl. No. 17 |
| Deemed-accrual rules for royalty | 1961 Act, section 9(1)(vi) | 2025 Act, section 9(6) |
| Deemed-accrual rules for fees for technical services | 1961 Act, section 9(1)(vii) | 2025 Act, section 9(7) |
| Applicable treaty-relief framework | 1961 Act, section 90 | 2025 Act, section 159 |
| Remittance-information framework | Forms 15CA/15CB, where applicable | Forms 145/146, where applicable, under Rule 220 |
The section number 195 in the 2025 Act does not replace the general non-resident withholding rule in section 195 of the 1961 Act.
A remittance after 1 April 2026 may relate to income accrued in February 2026. In its transition guidance, the Income Tax Department distinguishes the substantive law governing the underlying income from the procedural forms applicable when a remittance is made. The dates of accrual, ledger credit, payment, tax deduction and remittance must be examined separately. The invoice date alone is not decisive.
Is the payment for business services, fees for technical services or royalty?
An invoice description is a starting point, not a legal conclusion.
Fees for technical services
Section 9(7) of the 2025 Act includes, within the statutory definition, consideration for managerial, technical or consultancy services, including specified provision of personnel. The definition contains exclusions, including qualifying construction, assembly, mining or like projects undertaken by the recipient and consideration chargeable as salary.
Therefore, technical-services analysis is not confined to engineering or software development. An overseas vendor providing managerial or consulting work may require examination under the provision. Whether the foreign recipient’s income is taxable in India will also depend on the relevant source rule, exceptions and treaty.
Royalty and software rights
Section 9(6) addresses royalty and includes specified rights, property, information and other arrangements within the applicable statutory definition. An ordinary purchase of software for internal use and an arrangement granting a right to reproduce or distribute software should not automatically be treated alike.
The Supreme Court’s decision in Engineering Analysis Centre of Excellence Pvt. Ltd. (2 March 2021) addresses identified software licence and distribution arrangements under the 1961 Act and applicable treaties. Review petitions against it were dismissed on 23 April 2024, and a further batch on 11 May 2026. The decision is significant, but it is not a blanket exemption for all software payments. The contract, treaty and operative statutory period still matter.
Business income, reimbursements and mixed agreements
Some consideration may be ordinary business income rather than royalty or fees for technical services. The domestic source/business-connection provisions and the treaty business-profits article then require examination, including the relevant permanent-establishment rules.
A reimbursement label does not automatically establish a non-taxable payment. Whether there is an income element, markup or payment on behalf of another person can matter. An agreement may also combine licences, maintenance, consulting and support. The actual components, rather than the heading on one invoice, need to be identified.
Where the foreign supplier is an associated enterprise, transfer pricing is a separate Indian income-tax enquiry. A cross-border related-party service or licence may require arm’s-length pricing, records and reporting; correct withholding alone does not settle those requirements.
Can India tax services entirely performed overseas?
Yes, in some circumstances. The supplier’s physical location does not alone determine chargeability.
Under the 2025 Act, section 9(7) contains a deemed-accrual rule for specified fees for technical services payable by an Indian resident, subject to statutory exceptions. An important exception concerns services utilised in a business or profession carried on by the payer outside India, or for earning income from a source outside India. Section 9(6) contains corresponding source/use-related exceptions for relevant royalty arrangements.
Compare services used in an Indian factory with services actually utilised in the payer’s overseas business. Their treatment may differ even where the overseas provider carries out all work from the same foreign location.
The relevant evidence includes the commercial purpose, actual users and use of the deliverables, the contract, location and nature of the underlying business or income source, and the particular statutory rule. Where the vendor works and where the customer uses what it bought are different facts.
Can a DTAA restrict Indian tax on the payment?
Yes, but only when the recipient is entitled to the applicable agreement and the relevant treaty article supports the result.
Section 159(4) of the Income-tax Act, 2025 preserves the more-beneficial treaty principle, subject to the statute. The correct sequence is to determine domestic chargeability and then consider the treaty’s effect on India’s taxing right. A tax residency certificate is relevant evidence, not an automatic exemption.
The India-USA treaty: two routes for fees for included services
Article 12(4) of the India-USA DTAA defines fees for included services through distinct limbs. The first concerns qualifying services ancillary and subsidiary to certain royalty rights or property. The second includes technical or consultancy services that make available relevant technical knowledge, experience, skill, know-how or processes, or involve the development and transfer of a technical plan or design.
A consultant’s use of technical expertise does not necessarily mean that expertise was made available to the customer under that limb. Conversely, the separate ancillary-and-subsidiary limb cannot be ignored. The exclusions in Article 12(5) and the permanent-establishment/fixed-base interaction in Article 12(6) must also be considered.
The precise treaty text, protocol, any applicable modifications and anti-abuse rules control. This India-USA example is not a universal rule for treaties with the UK, UAE or Singapore.
What treaty documents matter?
Section 159(8) requires an eligible non-resident seeking treaty relief to obtain the relevant tax residency certificate and furnish prescribed information and documents. Form 41 is the successor to Form 10F under the 2026 procedural framework where applicable.
The payer’s evidence may include the recipient’s legal identity, treaty residence, relevant TRC and prescribed particulars, foreign tax identification, the actual agreement, a permanent-establishment representation where relevant and evidence bearing on beneficial ownership when required by the applicable article.
Declarations are evidence to assess. They cannot replace treaty eligibility or contradict the transaction’s actual facts.
When is TDS deducted, and what rate applies?
For the general non-resident entry under section 393(2), Table Sl. No. 17, the deduction is ordinarily linked to credit or payment, whichever occurs earlier, subject to the provision. The obligation may arise at ledger credit before the bank processes the eventual transfer. Crediting an amount to a suspense or similarly named account may also be relevant under the statutory rule.
There is no uniform foreign-vendor TDS rate
The general withholding entry refers to rates in force. The payer must identify the legal classification and recipient type, then apply the relevant domestic rate provisions and any valid treaty benefit, with applicable surcharge and cess where required.
Section 207(2) of the 2025 Act provides a 20% income-tax rate for specified royalty and fees for technical services. However, this applies only where its statutory conditions are satisfied. These concern, among other things, the recipient and qualifying agreement with the Government or an Indian concern, relevant approval or industrial-policy requirements, and the special treatment in section 207(3) of certain book copyright and computer-software arrangements.
Importantly, section 207(2) excludes income falling within section 59(1). Section 59 concerns qualifying royalty or technical-services income connected with an Indian permanent establishment or fixed place of profession and contains additional conditions. It may require a different computation framework. Mere existence of a permanent establishment is not enough by itself: the prescribed connection and other conditions matter.
Therefore 20% must not be applied mechanically to every overseas consultancy, software or royalty invoice. Nor should resident professional-fee withholding rates be applied simply because the word consultancy appears on a non-resident invoice.
If the payer contractually agrees to bear Indian withholding itself, the statutory gross-up question must also be considered. The commercial net payment and the relevant taxable gross amount need not be identical.
What if the foreign vendor has no Indian PAN?
Section 397(2) addresses higher deduction where PAN is not furnished. But Rule 217 of the Income-tax Rules, 2026 provides conditional relief for specified payments to qualifying non-residents or foreign companies without PAN. The rule covers categories including interest, royalty, fees for technical services, dividends and payments on transfer of capital assets, provided the prescribed identification and supporting details are furnished. It also contains a separate exception for qualifying persons not required to apply for PAN.
The relevant details include the recipient’s name and contact particulars, foreign residence address, a residence certificate where the foreign jurisdiction issues one, and a foreign tax identification number or qualifying alternative official identifier.
No PAN is not automatically equivalent to higher TDS in every case. Equally, providing these documents does not itself eliminate otherwise applicable tax or establish treaty eligibility.
Can the payer or recipient obtain a determination or certificate?
Section 395 provides distinct routes. An eligible payee may apply for a lower or nil deduction certificate under section 395(1), ordinarily through Form 128 under Rule 213. A payer considering that only a proportion of a payment is chargeable may seek the Assessing Officer’s determination under section 395(2), using Form 129 under Rule 214.
These are not interchangeable routes. An issued certificate or determination must be applied according to its actual validity, recipient, amounts, income and other conditions. Additional statutory/electronic mechanisms, where applicable, require their own eligibility check.
Which forms apply before an outward remittance?
From 1 April 2026, Form 145 is the relevant remitter information form and Form 146 is the accountant’s certificate used in the prescribed Part C route. They correspond to the earlier Forms 15CA and 15CB. Rule 220 supplies the operative categories.
| Payment and certificate position | General reporting route under Rule 220 |
|---|---|
| Chargeable payment or aggregate of such payments in the tax year up to ₹5 lakh | Form 145, Part A |
| Chargeable payment or aggregate exceeding ₹5 lakh, with an applicable Assessing Officer certificate/order under section 395(1) or (2) | Form 145, Part B |
| Chargeable payment or aggregate exceeding ₹5 lakh, with the prescribed accountant’s certificate | Form 146, followed by Form 145, Part C; Part C is not additionally required where Part B has been furnished |
| Sum not chargeable under the Act | Form 145, Part D, unless a specific Rule 220(3) exclusion applies |
The ₹5 lakh figure governs the reporting route. It is not an income-tax exemption or a general rule permitting payments without TDS.
Nor does every remittance above ₹5 lakh require Form 146. The availability of Part B, and whether the sum is chargeable at all, must first be determined.
Rule 220(3) lists exceptions for certain non-chargeable payments, including defined individual and IFSC remittances and specific purpose-code categories. Their application requires checking the actual remittance. No general exemption follows merely because the invoice is from a foreign service provider.
What is the normal payment and compliance sequence?
First identify the agreement and income character. Then establish domestic chargeability, treaty eligibility and any applicable certificates. Where TDS applies, determine the correct amount and deduction timing, deposit tax, and meet the relevant statement and certificate requirements. Prepare the applicable Form 145/146 route before remittance and submit the required information to the authorised dealer.
For ordinary non-government deductors, Rule 218 generally requires TDS to be paid by the seventh day after the month of deduction, with the specified 30 April deadline for March deductions. Special rules apply to certain categories and deductors.
For relevant non-resident payments, Form 144, replacing Form 27Q, is the quarterly TDS statement under Rule 219. Its ordinary quarter-end due dates are 31 July, 31 October, 31 January and 31 May, respectively. The deductor must also comply with applicable tax-deduction certificate requirements.
The remitter’s Form 145 obligation is separate from the authorised dealer’s quarterly Form 147 statement obligation under Rule 220(6). A bank’s report is not a substitute for the payer’s required forms or TDS compliance.
Does FEMA permit the payment once TDS has been handled?
Not necessarily. Income-tax compliance does not independently establish permission to remit foreign exchange.
The Foreign Exchange Management Act, 1999, the Foreign Exchange Management (Current Account Transactions) Rules, 2000 and applicable RBI directions govern the remittance route. The authorised dealer must assess the payment purpose and relevant documentation under that framework.
The RBI Master Direction on Other Remittance Facilities, updated as of 1 October 2026, identifies prior-approval thresholds for certain consultancy remittances by persons other than individuals: remittances exceeding US$10 million per infrastructure consultancy project, or US$1 million per project for other consultancy services procured from outside India. These limits concern specified foreign-exchange permissions, not TDS thresholds. Classification of the project and payment must be checked before relying on them.
Banks may require agreements, invoices, payment-purpose details, tax and identity records, or other supporting information depending on the transaction. Processing by the bank does not decide the vendor’s final Indian tax liability.
Does the invoice also create an Indian GST question?
Possibly. Indian GST is a separate enquiry. Under the IGST Act, 2017, the definition of import of services and the place-of-supply rules, including section 13 where a party is outside India, are relevant. Section 5 and the applicable reverse-charge notifications must then be considered, together with exemptions and other conditions.
A payment may give rise to an import-of-services GST question even where the income-tax withholding answer is different. Conversely, an overseas invoice is not taxable under GST merely because its issuer is foreign. The service, supply location and current notifications matter.
Which records should the payer retain?
| Record | What it helps establish |
|---|---|
| Vendor agreement, statement of work and deliverables | The services and legal obligations actually purchased |
| Software, licence and intellectual-property clauses | Rights granted and potential royalty classification |
| Invoice, accounts-payable ledger and bank records | Amounts, dates of credit, deduction and payment |
| Business-use and performance records | The relevant Indian or overseas utilisation facts |
| Recipient identity, TRC and Form 41 where applicable | Tax residence and treaty documentation |
| PAN or qualifying Rule 217 information | Identification and higher-rate deduction exception |
| PE, beneficial-ownership and supporting factual records | Particular treaty conditions where relevant |
| Certificate/order, Form 128/129 result where applicable | Authorised lower/nil deduction or chargeable proportion |
| TDS challan, Form 144 and relevant tax certificates | Tax deduction, deposit and reporting |
| Form 145/146 acknowledgements and bank purpose code | Remittance reporting and authorised-dealer processing |
| Transfer-pricing records where relevant | The associated-enterprise pricing and reporting examination |
A declaration is not a substitute for contractual facts. If the agreement, invoice and remittance-purpose description are inconsistent, that inconsistency may affect the legal analysis.
Example: Two ₹8 lakh foreign payments, two different tax enquiries
Assume that an Indian company makes two separate payments after 1 April 2026. This is an invented illustration, not a client case.
Payment A: ₹8 lakh for an overseas consultancy project, performed outside India but used in the Indian business. Payment B: ₹8 lakh for software under an agreement granting specified distribution rights.
| Controlling question | Payment A | Payment B |
|---|---|---|
| Starting classification | Consultancy or technical services | Rights under a software agreement |
| Contract evidence | Scope, services, deliverables, use | Licence, copyright and distribution rights |
| Domestic-law enquiry | FTS, ordinary business income and applicable source exceptions | Royalty or another income category |
| Treaty enquiry | Applicable services or business-profits article | Applicable royalty or business-profits article |
| TDS result | Not established solely by description | Not established solely by description |
| Form 145 route | Depends on chargeability and certificate position | Depends on chargeability and certificate position |
Each amount exceeds ₹5 lakh. If chargeable, the appropriate Rule 220 route must be examined. Equal invoice amounts do not mean equal withholding treatment. No particular tax amount or treaty rate is assumed in this example.
What if TDS is not correctly deducted or deposited?
Under section 398 of the 2025 Act, failure to deduct or pay tax as required can result in deductor-default consequences. Section 398(3) provides simple interest at 1% per month or part thereof for the period of failure to deduct, and 1.5% per month or part thereof for delay after deduction until payment, subject to the actual dates and conditions. Other legal consequences may also apply.
Section 398(2) provides conditional relief from being treated as an assessee in default where its recipient-return, income-inclusion, tax-payment and accountant-certification conditions are met. That relief does not automatically remove interest or every other consequence.
Section 35(b)(ii) separately addresses expense disallowance where tax on specified non-resident payments is not deducted or paid as required, with provisions for subsequent allowance. It must not be confused with the separate 30% disallowance rule for certain resident payments under section 35(b)(i).
Unnecessary deduction can also create commercial and administrative problems. Compliance means reaching the legally supportable withholding conclusion, not automatically applying the highest rate to every overseas invoice.
The distinction to retain
The contract tells the business what was bought. The income-tax law and applicable treaty establish the relevant Indian tax and withholding treatment. The remittance rules and authorised dealer address the documentation and route for moving funds. FEMA, GST and transfer pricing answer further, separate questions where they apply.
The bank transfers the money. The contract identifies what was purchased. The applicable tax law determines whether withholding is required.
Official sources and jurisdiction boundary
Principal sources reviewed on 22 October 2026:
- Income-tax Act, 2025, as amended by Finance Act, 2026
- Income-tax Rules, 2026, Rule 218, Rule 219 and Rule 220
- Section 397: PAN and reporting and Rule 217: qualifying no-PAN exception
- India-USA DTAA and its memorandum of understanding
- Income Tax Department transition guidance
- RBI Master Direction: Other Remittance Facilities
- IGST Act, 2017 and CBIC integrated-tax rate notifications
This article addresses Indian legal and regulatory questions. The income-tax, legal and reporting treatment in the USA, UK, UAE or any other foreign jurisdiction must be reviewed under the law there by a qualified professional in that jurisdiction. It is general educational material, not a certificate, legal opinion or conclusion about a specific payment. Verify the effective law, treaty, forms and regulatory requirements for the actual transaction date and facts.
Sources and review
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